Royal Bank (RY.TO)

(A Top Pick Feb 26/15. Down 13.63%.) Banks have been hit more recently, basically a matter of getting money out of the market. They are having pressure on the net interest margin side because of low interest rates. What is working well for them is the wealth management side and capital markets. (See Top Picks.)

Royal Bank (RY-T), Bank of Nova Scotia (BNS-T) or both, or should he wait? (His Top Pick is another bank that you must own!) Both these banks have big domestic retail and the cash from domestic retail gets reinvested into growth areas. In the case of this bank, it is primarily in wealth management and capital markets, more volatile businesses. He would do a half position on each, but wait.

He is inclined to think that regardless of oil prices, this bank will continue to make profits every quarter in the billions. We are not seeing any breakdown because of mortgages geographically.

Banks have been quite flat over the last year or so. When you are looking at PE ratios down to the 10 marker, they start to become somewhat attractive. But you also have to look at where the Canadian economy is going regarding oil prices and how it affects the banking sector. He likes this bank, but wouldn’t overweight the banks.

The valuations of banks are attractive. They are at the low end of their 20 year range. Canadian investors look at Canadian banks. They are secular outperforms and have beat the markets 75% of the time since 1970. When international investors look at Canadian banks, they see a high ROE with no recovery. Consumer debt levels have grown to a concerning level in Canada. They want some valuation upside through ROE improvement. They can’t do that because the banks are already too good. He does not think the next 20 years will be as good as the past 20 years. The same drivers that propelled the stock prices will not be there.

$80 in 3 year’s time? He would buy any of the Canadian banks now. They have had a big pull back. If you factor in yield, growth and pricing, it could reach $80-$85-$90. It just depends on market circumstances.

(Top Pick Jan 21/15, Down 1.02%) He sold in August to lower his exposure to the Canadian economy and bought BBT-N which is an eastern seaboard US regional bank.

Safe? A big picture issue overhanging all of the banks is where they get close to a point where they may have to increase their capital. This bank has the 2^nd best tier 1 capital ratio of all Canadian banks, so they have room. The only thing that would put their capital into jeopardy would be a major acquisition, but that would be viewed by the market is favourable. He wouldn’t be concerned about this bank.

The sector has undeservedly lagged. They increased the dividend 8%, earnings increased 9%, but the stock is down. They just closed on City National in the US, which focuses on high net worth.

The exit strategy for this is Nov 27, right when they come out with their earnings. This is a solid bank, but right now there are too many headwinds. Technically it hasn’t shown a lot of strength. Dividend yield of 4.3%.

(A Top Pick Dec 29/14. Down 6.68%.) Generally he likes the banks, especially those who have good US exposure, which means TD (TD-T), Royal (RY-T) and Bank of Montréal (BMO-T). (See Top Picks.)

Royal Bank (RY-T) or Bank of America (BAC-N)? Look at the economies of both countries and the balance sheets of both stocks. This is a good quality Canadian bank, but he feels the challenge in Canadian banks is that we have a slowing economy. Earnings growth is probably going to be marginal. You will get decent dividend, but that is about it. He would say there is a little more upside in US financials.

Largest bank in Canada, fantastic wealth manager and great franchise. They are targeting high net worth investors in major US cities. It has growth in the US channel and the high net worth channel. He likes the prospects going forward. 4.2% yield. They can manufacture earnings in their wealth management division.

Hold or switch to a US bank? You have to have some Canadian banks and this is one that he would definitely be buying. Doesn’t think the banks are going to give us spectacular growth, but they will give us solid performance. You will see dividend increases going forward.

(Market Call Minute.) You want to have US revenue in any of the Canadian banks that you own, so Toronto Dominion (TD-T) and this one are the ones that you want to own.